Today, I’m going to share with you something about which I’m very passionate! When it comes to helping people get out of debt and get ahead with their money, it’s hard to beat the Baby Steps.
What are the Baby Steps you ask? It’s what millions of people worldwide will attest to helping them get control of their money. It’s what Dave Ramsey put together about 25 years ago as he worked his way out of financial ruin.
It’s what my wife and I have been following for the three years of our marriage. And it works.
Now, without wasting time, let’s get an overview of the Baby Steps to start! Then we’ll go a little more in depth on each one.
The 7 Baby Steps
Baby Step 1: Save $1,000 in a beginner emergency fund.
Emergencies are a part of life, whether we like it or not (we don’t)! That’s why you need an emergency fund! You’re going to start out with $1,000. It might not seem like much but it will just be enough to get you by while you pay off your debt. Don’t freak out. Keep your pants on till step 3 at least.
Baby Step 2: Pay off all debt except for the house.
This is where your wild comes out! You’re going to pay off debt like there’s no tomorrow.
Or, uh, like there is a tomorrow and a collector is going to call you..
Anyway, the point of this step is to rid yourself of all non-mortgage debt. That means everything. How are you going to do it? Use the debt snowball.
The Debt Snowball
This is where you pay the minimums on all the debts you have except for the smallest one. Then you put all you possibly can towards paying off that smallest debt. Once that’s gone, you do the same with the next smallest one. When that’s gone, you do it on the next one.
It might not be the best way to pay off debt mathematically, but it will help you gain momentum which is what we care most about. Most people would think they should pay off the highest interest rate debt first. Ultimately, it’s up to you, but if you stick to the debt snowball, you will gain momentum and will knock it out. People do it all the time.
Baby Step 3: Save 3-6 months of expenses for emergencies.
This is where your finances get just a tad more comfortable! You already have your $1,000 emergency fund (presuming there wasn’t an emergency that happened within the last paragraph). Now just expand it to 3-6 months!
Make sure you don’t get confused here — it’s not 3-6 months of incomes, just expenses. Calculate your expenses for a month and just multiply it by 3 or 6. Now, this is going to depend more on you and your comfort level. Do you have consistent income or inconsistent income? Do you have a high or low risk tolerance? Choose how many months you want covered based on that.
Make sure you save this fund into a place you can get to it quickly. That means no investing with it. Just throw it in a high yield savings account and watch it grow slowly but surely.
Baby Step 4: Save 15 % of your income for retirement.
Did someone say retirement? Travel?
This step takes some extra self discipline because you have to be willing to give up a good chunk of your money to ensure you don’t have nothing in the future.
Wherever you work, go to your HR representative and ask about a retirement account. Most employers have them. If they offer an employer match, make sure you take advantage of it!
One thing to note: You want to be putting your retirement money into a tax-favored account. That means putting it into a Roth 401(k) and a Roth IRA. These will allow you to pay taxes on the money you contribute now, and then, when you retire, you’ll be able to withdraw the money plus all the growth at no tax rate.
Baby Step 5: Save for college for your children.
Some parents like to ensure their child never has any debt. Other parents find they prefer to teach their child the value of money by making them pay for everything in college. My parents did somewhat of a hybrid. It’s completely up to you.
Baby Step 6: Pay off the house early.
Don’t wait till the end of the mortgage! Throw some extra payments on that now as you are able. Make sure it goes straight to the principle. This will be your last EVER debt!
I am so unbelievably excited to pay off our house early. It’ll still be a while but I am motivated.
Also, just so you know, Baby Steps 4, 5, and 6 are to be completed simultaneously.
Baby Step 7: Build wealth and give.
Continue what you’re doing except now you can add more money into that retirement account! Maybe you want to start investing in real estate. Now’s the time!
And most importantly, give outrageously. Generous people are attractive people.
Do the Baby Steps Work?
Absolutely. They have worked for millions of people.
Here’s why I like the Baby Steps. Out in the world are gobs of people trying to help you hack your life financially. They’ll tell you about credit card churning, traveling on credit card points, etc. just to make a little extra cash. I like the Baby Steps because it’s simple. There are no if’s and’s or but’s. It works the same way for everyone, regardless of life circumstance, salary, etc.
And it’s a proven method that will work for you too.